9 ms·

Being an executive at a (substantially smaller) SaaS startup I have no idea how having up to 90% of your revenue be fabricated could happen without others knowi

Being an executive at a (substantially smaller) SaaS startup I have no idea how having up to 90% of your revenue be fabricated could happen without others knowing: - where are the contracts corresponding to revenue? Yeah they are SaaS focused on SMB but this is a financial product, there will be contracts, NDAs, etc - if the majority of the customers are fake there is such little load on the system. How does engineering not figure that out? - How does no one see an insanely low COGs when paying the cloud services bills, or the lack of allocated resources when looking in the management interfaces? - Even saas Products with supposedly a no touch sales process still have sales people and sales engineers for key accounts. What are all the sales people doing if they’re not running trials? - let’s say he hid all of this by having tens of thousands of $10 a month customers. How does your VP of sales not get totally freaked out that the overwhelming majority of revenue is coming from no touch sales? If that’s the case that radically changes your growth and go to market strategies. The entire go-to- market team should be wondering what is going on? Same with product management. Your roadmap would be completely different with a long tail of extremely low revenue customers. - how does sales/client success not notice that no one is expanding? How they aren’t talking to small customers about expansions? - How does no one notice a complete lack of analytics or actions being generated by all the supposed customers? - product management is going to want to get feedback from all of these customers. They’re going to be looking in analytics tools or session replay tools like fullstory. They’re going to look at the accounts and users and do outreach to emails asking for meetings. Aren’t they going to notice all of those people are fake? - support/client success is going to have insanely high customer to support person ratios. Where are all the support tickets for that many customers? - Managing cash flow would be very hard. Finance is going to see all this revenue coming in and want to scale. The VCs are going to want to see money being spent on marketing activities etc. to further the growth. If there’s no corresponding revenue being spent to acquire customers but tons of revenue coming in that’s a giant red flag

WrtCdEvrydy 6y ago
Because the larger startups are driven by people who know financial engineering... this guy got caught because the money stopped (due to layoffs). Noone gives a shit when they're getting paid.
- squashua667 6y ago
  Nope. He got caught when it was discovered that the "customer revenue" bank account was being manipulated to look like tens of millions were in there when it was more like tens of thousands. The other bank account had tens of millions in there thanks to the investment money. The layoffs came once the board faced the truth of the matter and Adam Rogas suddenly resigned.
  - WrtCdEvrydy 6y ago
    Okay, if that's the order, then yeah, someone should have said something.
    - solumos 6y ago
      My guess is that anyone who ended up "saying something" to the CEO was either quieted by lies or forced out of the business.
squashua667 6y ago
- where are the contracts corresponding to revenue? Yeah they are an SMB SaaS but this is financial, there will be contracts, NDAs, etc SMB, especially the small end of SMB, does not often have contracts. It's more subscription based. That said, there were 2 versions of the software running at NS8. One was the original software that Adam Rogas and a co-founder created early on. That version was rather "opaque" and reported growing customer numbers every month. The newer version of the software was controlled by the product dev team but still reliant on the original software in some key areas. Basically, everything was obfuscated well enough to confuse everyone to the point where answers of, "it's a limitation of the original software" were taken at face value. - if the customers are fake there is no load on the system. How does engineering not figure that out? There were real customers and the customer growth was happening, especially in 2020. The problem is that the customer base and growth was nowhere near what Adam Rogas was cooking up on the backend. - How does no one see an insanely low COGs when paying the cloud services bills, or the lack of allocated resources when looking in the management interfaces? COGs and other bills were kept relatively high. It's also why the company hired 200+ people, to make the story all the more believable. - How does no one notice a complete lack of analytics or actions being generated by all the supposed customers? Again, real numbers were difficult to gather for excuses given repeatedly by Adam Rogas and others charged with providing those numbers. I'm not saying that others were complicit in the scam, but that they were (at least) being fed the same excuses the rest were. Investments were never made to bring visibility to the customer metrics. Was this a red flag? Yes, but then why are investors giving NS8 so much money? It's hindsight 20/20. - Managing cash flow would be very hard. Finance is going to see all this revenue coming in and want to scale. The VCs are going to want to see money being spent on marketing activities etc. to further the growth. If there’s no corresponding revenue being spent to acquire customers but tons of revenue coming in that’s a giant red flag Right, so plenty of money was being spent across the board. There were 2 bank accounts according to the DOJ and SEC complaints. The account for "customer revenue" was solely controlled by Adam Rogas. The other account held the investment funds that paid all the bills. Is this super shady? Yep. And it seems there was an NS8 whistleblower who kicked off the initial SEC investigation and then the FBI getting involved as well.
- billyhoffman 6y ago
CatShitTodd 6y ago
> How does no one see an insanely low COGs when paying the cloud services bills, or the lack of allocated resources when looking in the management interfaces? Big data and a flawed system. They sell a service that is based off of using integrations. If you stop paying for the integrations, you should stop receiving the service. That in turn hurts their level of service offerings. To be of any value, they have to monitor a ton of transnational data. So even if you quit paying, they still monitored your data and their modules were flawed that is still showed their acceptance score if you stopped paying.
dustingetz 6y ago
It is difficult to get a man to understand something when his salary depends upon his not understanding it.
PragmaticPulp 6y ago
None of it makes sense in the context of a well-run business with proper executives in place. That’s because these frauds don’t operate like a well-run business. Usually, the upper management teams are extremely lean. The business is broken up into different silos such that few people can see the big picture. Each is led to believe they are a tiny fraction of the overall revenue, giving them the impression that the bulk of the company’s revenue must come from another department where they have no visibility. As a bonus, this motivates siloed teams to feel like they need to catchup to the rest of the company, when in reality they might be the main driver of it. It helps to have separate offices and a culture of secrecy to prevent people from comparing notes. The CEO positions himself as a controlling, micromanaging individual at the center of everything. This makes it possible for the CEO to intercept financials and other crucial numbers en route to people who might catch on. The rest of the management staff might be filled with people too inexperienced to recognize that something is wrong. They might think the CEO is doing them a favor by giving them a golden opportunity to advance their career into an executive position at a rocket ship startup. They don’t know what they’re doing, but they think it’s okay because the CEO has taken them under his wing. At scale it becomes difficult to do this without at least a few people being complicit, though. A fraudster usually has several close associates who can be trusted to be in on the fraud or at least look the other way for a while.
- liability 6y ago
  Sometimes tribal/"team sport" group dynamics keep employees inline too. Executives can foster an "us against the world" mentality that blinds workers to that which is obvious to everybody else. When in this mindset, people have the ability to ignore even the most damning evidence. Here's an example: When Enron's CEO verbally attacked wall street analyst Richard Grubman for questioning Enron's accounting practices, Enron employees thought this was hilarious and adopted the insult as a sort of inside joke. They didn't consider Richard Grubman's position, they just took delight in 'their team' dunking on 'opposing team.'
  - rapnie 6y ago
    This is massively scalable. There are examples, but I do not want to get political.
tempsy 6y ago
Have you seen $GSX, a publicly traded $20B stock on Nasdaq that claims it's growing faster than early Google or Facebook and has been the subject of 5-6 short seller reports and an ongoing SEC investigation?
- anoraca 6y ago
  PE ratio of over 500... oof
- dmix 6y ago
  Seems like the main research company that exposed GSX has made a business out of exposing Chinese public companies https://grizzlyreports.com/research/ https://grizzlyreports.com/research/ Some interesting stuff here. The company of course refuted the research with some vague stuff about APIs having encryption so the data would be wrong. This was back in June and the stock seems to be still going along strong... http://gsx.investorroom.com/2020-06-03-GSX-Refutes-Grizzly-Researchs-Follow-Up-Report http://gsx.investorroom.com/2020-06-03-GSX-Refutes-Grizzly-R...
  - fakedang 6y ago
    Muddy Waters got a report on GSX too.
stickfigure 6y ago
How would engineering know what the CEO is telling investors? I once had a (majority-share) cofounder CEO who, when the company hit success, became extremely controlling with the books and investor relationships. There was no way for the rest of the cofounders - let alone engineering - to know what was actually going on or what the true state of health of the company was. I (and the other cofounders, and the senior engineering staff) walked away. Big life lesson. With lazy enough investors, it wouldn't surprise me that a CEO/owner could compartmentalize enough information that the employees and investors might have totally different understandings. The CFO would be suspect, though.
- HappyDreamer 6y ago
  > I (and the other cofounders, and the senior engineering staff) walked away I wonder what happened after that, how did you leaving affect the company
duxup 6y ago
Reminds me of DC Solar, and they claimed to make physical products... You'd think some folks working from there would wonder "Hey, does anyone KNOW anyone else working at the other factories, because we're only making X per day..."?
IncRnd 6y ago
People see what they expect to see. This could be accomplished by lying at every step of the way and by fabricating audit results. It lasts until it doesn't, and that's apparently what happened here.
letstryagain2 6y ago
You can fake everything. And most people don't expect this. Wirecard opened a fake Bank Branch from a Philippines Bank in Singapore, had the EY guys walk in there and "verify" the Billion dollar balance on the computer screen.
pge 6y ago
Where was the board during this whole time? I have trouble understanding how a board allows a management team to operate in such a way that controls aren't in place (eg basic segregation of duties in finance) that would prevent or at minimum reveal this kind of behavior. The board should be seeing enough information that most of the flags you highlight should be visible to them. Not to mention, clearly the company was never audited. Regular audits should be standard practice for any company of that size. In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities.
- solumos 6y ago
  > Regular audits should be standard practice for any company of that size. The company was audited twice, but the auditors tied the fraudulent bank statements to the fraudulent financial statements (woops). > In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities. Full cooperation with the SEC can get you a long way, especially if you're one of the victims of fraud.
  - pge 6y ago
    Are you sure they were audited? I havent seen that in the material released so far, only that an auditor was engaged for due diligence, which was fairly cursory, not anywhere near an actual audit. Typically an audit would involve a direct verification of bank balances from the bank. In addition, an audit would typically directly verify customer contracts and make sure big deposits tied out to contracts and invoices. An audit would also have flagged the lack of segregation of duties as a major risk factor (though that should have been obvious to any board member). As a side note, I also wonder if Rogas was fastidious enough to ensure the GAAP financial statements all tied out with the fraudulent numbers. I guess if an audit couldn't catch this, you have the wrong auditor. This is exactly what audits are for.
    - deleted 6y ago
      [deleted]
jlarocco 6y ago
I was wondering the same thing. I can see 5 or 10% slipping under the radar, but 90%? What were these 200 employees even working on? Engineering would be the most distant from customers, I guess, but even they must've noticed how few bugs were coming in. Hard to believe it wasn't found out earlier.
deleted 6y ago
[deleted]
temikus 6y ago
A serious question - if I may. Where do you work? Sounds like a great company. If you cannot respond - totally fair :)

WrtCdEvrydy 6y ago

Because the larger startups are driven by people who know financial engineering... this guy got caught because the money stopped (due to layoffs). Noone gives a shit when they're getting paid.

squashua667 6y ago
Nope. He got caught when it was discovered that the "customer revenue" bank account was being manipulated to look like tens of millions were in there when it was more like tens of thousands. The other bank account had tens of millions in there thanks to the investment money. The layoffs came once the board faced the truth of the matter and Adam Rogas suddenly resigned.
- WrtCdEvrydy 6y ago
  Okay, if that's the order, then yeah, someone should have said something.
  - solumos 6y ago
    My guess is that anyone who ended up "saying something" to the CEO was either quieted by lies or forced out of the business.

squashua667 6y ago

- where are the contracts corresponding to revenue? Yeah they are an SMB SaaS but this is financial, there will be contracts, NDAs, etc SMB, especially the small end of SMB, does not often have contracts. It's more subscription based. That said, there were 2 versions of the software running at NS8. One was the original software that Adam Rogas and a co-founder created early on. That version was rather "opaque" and reported growing customer numbers every month. The newer version of the software was controlled by the product dev team but still reliant on the original software in some key areas. Basically, everything was obfuscated well enough to confuse everyone to the point where answers of, "it's a limitation of the original software" were taken at face value. - if the customers are fake there is no load on the system. How does engineering not figure that out? There were real customers and the customer growth was happening, especially in 2020. The problem is that the customer base and growth was nowhere near what Adam Rogas was cooking up on the backend. - How does no one see an insanely low COGs when paying the cloud services bills, or the lack of allocated resources when looking in the management interfaces? COGs and other bills were kept relatively high. It's also why the company hired 200+ people, to make the story all the more believable. - How does no one notice a complete lack of analytics or actions being generated by all the supposed customers? Again, real numbers were difficult to gather for excuses given repeatedly by Adam Rogas and others charged with providing those numbers. I'm not saying that others were complicit in the scam, but that they were (at least) being fed the same excuses the rest were. Investments were never made to bring visibility to the customer metrics. Was this a red flag? Yes, but then why are investors giving NS8 so much money? It's hindsight 20/20. - Managing cash flow would be very hard. Finance is going to see all this revenue coming in and want to scale. The VCs are going to want to see money being spent on marketing activities etc. to further the growth. If there’s no corresponding revenue being spent to acquire customers but tons of revenue coming in that’s a giant red flag Right, so plenty of money was being spent across the board. There were 2 bank accounts according to the DOJ and SEC complaints. The account for "customer revenue" was solely controlled by Adam Rogas. The other account held the investment funds that paid all the bills. Is this super shady? Yep. And it seems there was an NS8 whistleblower who kicked off the initial SEC investigation and then the FBI getting involved as well.

billyhoffman 6y ago

CatShitTodd 6y ago

> How does no one see an insanely low COGs when paying the cloud services bills, or the lack of allocated resources when looking in the management interfaces? Big data and a flawed system. They sell a service that is based off of using integrations. If you stop paying for the integrations, you should stop receiving the service. That in turn hurts their level of service offerings. To be of any value, they have to monitor a ton of transnational data. So even if you quit paying, they still monitored your data and their modules were flawed that is still showed their acceptance score if you stopped paying.

dustingetz 6y ago

It is difficult to get a man to understand something when his salary depends upon his not understanding it.

PragmaticPulp 6y ago

None of it makes sense in the context of a well-run business with proper executives in place. That’s because these frauds don’t operate like a well-run business. Usually, the upper management teams are extremely lean. The business is broken up into different silos such that few people can see the big picture. Each is led to believe they are a tiny fraction of the overall revenue, giving them the impression that the bulk of the company’s revenue must come from another department where they have no visibility. As a bonus, this motivates siloed teams to feel like they need to catchup to the rest of the company, when in reality they might be the main driver of it. It helps to have separate offices and a culture of secrecy to prevent people from comparing notes. The CEO positions himself as a controlling, micromanaging individual at the center of everything. This makes it possible for the CEO to intercept financials and other crucial numbers en route to people who might catch on. The rest of the management staff might be filled with people too inexperienced to recognize that something is wrong. They might think the CEO is doing them a favor by giving them a golden opportunity to advance their career into an executive position at a rocket ship startup. They don’t know what they’re doing, but they think it’s okay because the CEO has taken them under his wing. At scale it becomes difficult to do this without at least a few people being complicit, though. A fraudster usually has several close associates who can be trusted to be in on the fraud or at least look the other way for a while.

liability 6y ago
Sometimes tribal/"team sport" group dynamics keep employees inline too. Executives can foster an "us against the world" mentality that blinds workers to that which is obvious to everybody else. When in this mindset, people have the ability to ignore even the most damning evidence. Here's an example: When Enron's CEO verbally attacked wall street analyst Richard Grubman for questioning Enron's accounting practices, Enron employees thought this was hilarious and adopted the insult as a sort of inside joke. They didn't consider Richard Grubman's position, they just took delight in 'their team' dunking on 'opposing team.'
- rapnie 6y ago
  This is massively scalable. There are examples, but I do not want to get political.

tempsy 6y ago

Have you seen $GSX, a publicly traded $20B stock on Nasdaq that claims it's growing faster than early Google or Facebook and has been the subject of 5-6 short seller reports and an ongoing SEC investigation?

anoraca 6y ago
PE ratio of over 500... oof
dmix 6y ago
Seems like the main research company that exposed GSX has made a business out of exposing Chinese public companies https://grizzlyreports.com/research/ https://grizzlyreports.com/research/ Some interesting stuff here. The company of course refuted the research with some vague stuff about APIs having encryption so the data would be wrong. This was back in June and the stock seems to be still going along strong... http://gsx.investorroom.com/2020-06-03-GSX-Refutes-Grizzly-Researchs-Follow-Up-Report http://gsx.investorroom.com/2020-06-03-GSX-Refutes-Grizzly-R...
- fakedang 6y ago
  Muddy Waters got a report on GSX too.

stickfigure 6y ago

How would engineering know what the CEO is telling investors? I once had a (majority-share) cofounder CEO who, when the company hit success, became extremely controlling with the books and investor relationships. There was no way for the rest of the cofounders - let alone engineering - to know what was actually going on or what the true state of health of the company was. I (and the other cofounders, and the senior engineering staff) walked away. Big life lesson. With lazy enough investors, it wouldn't surprise me that a CEO/owner could compartmentalize enough information that the employees and investors might have totally different understandings. The CFO would be suspect, though.

HappyDreamer 6y ago
> I (and the other cofounders, and the senior engineering staff) walked away I wonder what happened after that, how did you leaving affect the company

duxup 6y ago

Reminds me of DC Solar, and they claimed to make physical products... You'd think some folks working from there would wonder "Hey, does anyone KNOW anyone else working at the other factories, because we're only making X per day..."?

IncRnd 6y ago

People see what they expect to see. This could be accomplished by lying at every step of the way and by fabricating audit results. It lasts until it doesn't, and that's apparently what happened here.

letstryagain2 6y ago

You can fake everything. And most people don't expect this. Wirecard opened a fake Bank Branch from a Philippines Bank in Singapore, had the EY guys walk in there and "verify" the Billion dollar balance on the computer screen.

pge 6y ago

Where was the board during this whole time? I have trouble understanding how a board allows a management team to operate in such a way that controls aren't in place (eg basic segregation of duties in finance) that would prevent or at minimum reveal this kind of behavior. The board should be seeing enough information that most of the flags you highlight should be visible to them. Not to mention, clearly the company was never audited. Regular audits should be standard practice for any company of that size. In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities.

solumos 6y ago
> Regular audits should be standard practice for any company of that size. The company was audited twice, but the auditors tied the fraudulent bank statements to the fraudulent financial statements (woops). > In any case, it will be interesting to see what consequences there are for board members that appear to have failed in their basic responsibilities. Full cooperation with the SEC can get you a long way, especially if you're one of the victims of fraud.
- pge 6y ago
  Are you sure they were audited? I havent seen that in the material released so far, only that an auditor was engaged for due diligence, which was fairly cursory, not anywhere near an actual audit. Typically an audit would involve a direct verification of bank balances from the bank. In addition, an audit would typically directly verify customer contracts and make sure big deposits tied out to contracts and invoices. An audit would also have flagged the lack of segregation of duties as a major risk factor (though that should have been obvious to any board member). As a side note, I also wonder if Rogas was fastidious enough to ensure the GAAP financial statements all tied out with the fraudulent numbers. I guess if an audit couldn't catch this, you have the wrong auditor. This is exactly what audits are for.
  - deleted 6y ago
    [deleted]

jlarocco 6y ago

I was wondering the same thing. I can see 5 or 10% slipping under the radar, but 90%? What were these 200 employees even working on? Engineering would be the most distant from customers, I guess, but even they must've noticed how few bugs were coming in. Hard to believe it wasn't found out earlier.

deleted 6y ago

[deleted]

temikus 6y ago

A serious question - if I may. Where do you work? Sounds like a great company. If you cannot respond - totally fair :)